Published May 29, 2006

Are MLM Companies a Scam?

Budding entrepreneurs looking for an idea to start a business will, at some point, stumble across MLM as a possible business. "MLM" -- Multi-Level Marketing -- also goes by the term Network marketing. Others will call their business a mentoring model, and try to separate themselves from the MLM label. And some call it a pyramid scheme.

The federal government has ruled on the difference between MLM and a pyramid scheme: The difference, they say, is that pyramid schemes expect a high buy-in with emphasis on signing others up while MLM actually has products that are sold.

If you say to someone that you're in MLM, you'll get one of two reactions: They either love MLM themselves and buy into the business model, or they hate it. Those who love it see the potential upside. Those who hate it have either been burned in the past or are sick of friends hounding them with a "new business opportunity."

It's true, MLM does not have a great rap with some. But that doesn't necessarily mean it's bad. The theory behind Network marketing is strong: Relational and word-of-mouth business building has always been one of the strongest ways to build business. Most traditional-style (that is, non-MLM) business owners will tell you that the best customers are the ones who were referred through word-of-mouth from satisfied customers.

So why does MLM have such a bad rap?

The main reason is that, although MLM companies do offer a variety of products (usually good products at reasonable prices), many MLM marketers see the possibility of making more money with their "downstream" (the people they sign up who will sell products and share a cut of the profits) than with actually selling products. And, for the most part, many MLM companies spend more time encouraging their new recruits to build the downstream rather than sell products.

I know people who have not been successful with MLM. And, I know people who earn a living (not "get rich quick" but actually earn a living) with MLM. Frankly, the ones who were not successful tried to do it as a sideline to their regular job and spent more time trying to find additional recruits. The ones who earned a living - who were successful - did so by not placing such a priority on the downstream and rather spent their energy and focus on selling products.

Which is how a business makes money.

And if that's the case - if the successful ones are the ones who are selling the products, not building a downstream - then they are simply independent sales people with a catalogue of products. But success with that method requires some sweat.

Is MLM a scam? No, it's not. Unfortunately it's a popular business model with people who are not willing to put in the sweat equity required to make a business successful.

If you are looking at MLM opportunities, be aware that your success will be measurable only if your primary focus is on selling products, not on finding friends and family to sell products for you. Unfortunately, many MLM companies will be measuring you on how big your downstream is.